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Goods account balance on the mend after a record deficit in autumn 2022

Even though the deficit on goods trade was sizeable in February, it has been firmly on the decline since peaking this past autumn. It looks set to remain considerably more modest than was generally seen last year and to be less of a drag on the ISK exchange rate than it was in H2/2022.

In February, the balance on goods showed a deficit of ISK 26bn, according to recently published preliminary figures from Statistics Iceland (SI). It was quite a bit larger than the ISK 15bn and ISK 12bn deficits recorded in January and December, respectively, but for most of last autumn, the deficit was far larger, and in October it hit an all-time high of ISK 57bn.

Month-to-month fluctuations in aluminium exports

Goods exports have tapered off since December, when they exceeded ISK 100bn for the first time. Goods exports totalled nearly ISK 74bn in February, an increase in nominal terms of nearly 12% year-on-year. As the chart indicates, the December peak was due in large part to unusually strong aluminium exports after two meagre months.

Aluminium exports can fluctuate from month to month, depending on conditions in shipping and the like, although manufacturing output at the smelters themselves is very stable. Short-term volatility in aluminium export values is therefore a sign of global market prices rather than swings in production levels. In 2023 to date, aluminium prices have held relatively steady at USD 2,500 per tonne, after surging in the wake of Russia’s invasion of Ukraine and then receding as 2022 advanced. In historical context, however, prices are relatively high, and presumably this will be reflected in export figures over the months to come.

Goods imports soared to record highs last autumn

Goods imports totalled nearly ISK 100bn in February, an increase of almost 23% YoY in ISK terms. On the other hand, imports have tapered off since hitting a record high last October. Fuel imports in particular have fallen from last autumn’s astonishing levels. Although increased air traffic, stronger activity throughout the economy, and higher prices contributed greatly to that spike, it is difficult to attribute it entirely to these variables. In any event, figures for oil and fuel imports are now better in line with those from the pre-pandemic period, after adjusting for price and exchange rate movements.

Furthermore, imports of motor vehicles have eased after last autumn’s surge, as have imports of commodities and operational inputs. The latter have been affected by alumina prices, which have fluctuated in tandem with the price of aluminium, rising early in 2022 and then falling again.

Although the goods account still shows strong growth in both imports and exports, the pace of growth has slowed markedly since last autumn. If the figures are adjusted for exchange movements using the Central Bank’s (CBI) trade-weighted exchange rate index (TWI), it can be seen that over the past three months, YoY export growth has averaged 11% per month and import growth 14%. The gap between the two has therefore narrowed significantly.

TWI-adjusted export growth peaked at 47% in summer 2022, while import growth was even stronger, topping out at 54% that autumn. The downturn in import growth is also more recent, which largely explains the record goods account deficit in the autumn.

More moderate goods account deficit expected in coming quarters

We expect that the goods account surplus will be considerably more modest in coming quarters than it was in H1/2022. Prospects for exports are quite good, the global market price of Iceland’s key exported goods is relatively high, the capelin season looks set to generate far more value than was envisioned at the turn of the year, and farmed fish production is growing apace, to mention just a few factors.

On the other hand, the outlook is for a continued slowdown in import growth, particularly to include consumer goods imports. New motor vehicle sales to individuals contracted by 15% YoY in the first two months of 2023, according to recent data from Bílgreinasambandið (the Icelandic association of motor vehicle sales and service entities), and sales to individuals in 2023 as a whole are set to grow more modestly than last year’s 13%. Other imported goods are likely to follow a similar pattern.

As we see it, in H2/2022 the ISK exchange rate was strongly affected by Iceland’s gaping goods account deficit, which – together with growing services imports – offset last year’s surge in export revenues with room to spare. As a result, it is quite likely that the deficit on goods trade will be far less of a drag on the ISK exchange rate in 2023.


Jón Bjarki Bentsson

Chief economist